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If a mutual fund or ETF holds securities that have appreciated in value, and sells them for any reason, they will create a capital gain. However, due to the structural differences in the way the shares are created, an ETF fund can avoid recognizing capital gains on trading profits because they can avoid the outright selling of holdings triggering a capital gain that would have to be distributed.

Mutual funds and ETFs risk generating tax bills for investors whenever they sell stocks in a fund’s portfolio at a profit. Investors can be liable for taxes on those capital gains even though they themselves don’t sell their fund shares. Mutual funds are required to pass on capital gains taxes to investors through the life of the investment, but ETFs incur capital gains only upon sales of the ETF.

When an ETF experiences redemptions, it can hand over a basket of the fund’s underlying securities instead of cash. It can also pick which shares to hand over, picking the shares with the highest cost basis will reduce the greatest embedded capital gains. Because the trade is conducted in-kind, no capital gains are realized. Although, ETFs don’t shield dividend and interest income from current taxation.

From the perspective of the Internal Revenue Service, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the timing on the ultimate tax bill, after the ETF is sold and capital gains tax is incurred, is left up to the the investor.

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I recently read a post on the teachings of Benjamin Franklin by Tren Griffin at 25iq. A great article about one of the most fascinating people in history. In the section about important lessons Franklin taught us was the axiom “an investment in knowledge always pays the best interest.”

An overlooked part of most people’s assets is the role of human capital in their lifetime earning ability. Many people view education as a means to secure a job, when really it should be looked at as an asset that is carried with you throughout your life. Your ability to earn a living is the most important determinant in the standard of living you will have during your working years and into retirement.

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According to McKinsey & Co., Wall Street trading will be dominated even more by firms that embrace cutting edge technologies to streamline operations and trim costs. More efficient trading technology will lower the costs for the investor, but at what cost?

Based on my observances over the last 25 years, I would say the cost to investors will be the continued erosion of liquidity, and more “Flash Crash” events.

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There are only two ways to grow earnings in a business, one is to sell more and the other is to spend less. Valeant Pharmaceuticals is an example of taking those two axioms to the extreme and what the consequences can be when the investors have decided that the strategy is no longer executable.

Valeant Pharmaceuticals has been one of the best performing growth stocks of the last five years taking revenues from $2.4 billion in 2011 to $9.2 billion in 2014, and generating an 854% return for shareholders. So what’s the problem right?

The problem is that investing in “Rollups,” or stocks that grow through serial acquisitions, usually reaches a tipping point where the investors and sponsors of the strategy lose faith in management’s ability to continue to execute and decide to exit. When the stock begins to fall, management loses its currency to make further acquisitions and the story usually ends badly for investors.

So let’s look at what we can learn from the get rich quick through acquisitions strategy:

Growth is the key to the strategy – Valeant did 50 acquisitions – Making acquisitions to grow the top line revenues and cutting redundant expenses is great for results in the short-term, but integrating 50 acquisitions into one company can be a daunting task. Given that the CEO of Valeant has been described as a hard-charging deal maker whose McKinsey & Co. background has trained him how to make a P&L look good in the short-term, there has been little spent on R&D and a big emphasis on hitting the quarterly EPS numbers.

Rollups are not growth stories – The growth comes from adding revenues through acquisitions, not producing innovative new products or finding some new untapped market. Basically it boils down to financially engineered growth.

The party eventually ends – Like a game of musical chairs, the stock will continue to perform as long as investors have confidence that management can execute, but as the acquisitions required to grow the top line become bigger and bigger, the management needs a strong stock price to continue to execute and when the stock begins to sell off it becomes a broken strategy and ultimately a broken stock.

Rollup strategies are just get rich quick schemes for the insiders. Invest in companies where the management is intent on creating shareholder value through building better products or providing a better service. One with a competitive advantage in the marketplace and a large moat that protects that advantage.